"Trading is statistics and time series analysis." This blog details my progress in developing a systematic trading system for use on the futures and forex markets, with discussion of the various indicators and other inputs used in the creation of the system. Also discussed are some of the issues/problems encountered during this development process. Within the blog posts there are links to other web pages that are/have been useful to me.

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Sunday, 30 May 2010

Timing short term market turns

The top plot above shows the sine wave modelled prices in white, with the Cybercycle indicator plotted in Cyan and blue. The bottom plot shows an indicator I have created to time the turns in the original, white series based upon the Cybercycle.

The basic theory behind the projected use of this indicator is simple: extract the cyclic component of price using the Cybercycle, measure the period of the cycle, and when the Cybercycle crosses its zeroline it can be anticipated that in one quarter period's time the turn will occur. This anticipated turning point is indicated when the white sawtooth line (the time elapsed since the last Cybercycle zeroline cross) reaches the three horizontal green lines (2 days before, 1 day before and the actual "turn" day counted out from the last Cybercycle zeroline cross). The white sawtooth is reset to zero each time a Cybercycle zeroline cross occurs (shown by the red lines). This indicator has been optimised using MC techniques to account for the lead/lag at different periods of the Cybercycle compared to the original input price series.

This new indicator, combined with the previously described Tukey Chart, will provide decision making input to the final system. Projected uses might be something like:

if a Cybercycle zeroline cross occurs whilst prices are within the Tukey upper and lower contol limits, can anticipate a short term market turn in 1/4 period's time

if prices reach either Tukey control limit at the same time the sawtooth reaches the green lines, a signal is given to take profits, take a new position etc.

These ideas will be tested on market data, along with the Tukey Charts, in due course. However for the moment I now want to work on a new idea which, if I can successfully code it, I believe will complement the above.